American Manufacturing in Mexico

Since NAFTA’s passage, Mexico has become the third-largest U.S. trading partner behind Canada and China

By Ken Krizner, World Trade 100

Like other parts of the economy, trade between Mexico and the United States took a hit during the global recession of the past several years. But as the economy has recovered somewhat since 2008-09, trade between the two countries has recovered as well.

U.S. trade with Mexico (imports and exports) was at more than $460 million in 2011, compared with nearly $394 million in 2010 and $305.5 million in 2009, according to the U.S. Census Bureau. Through the first three months of 2012, trade stood at $122.4 million, compared with nearly $87 million during the first three months of 2011.

At the heart of the U.S.-Mexico trade relationship is the North American Free Trade Agreement (NAFTA), which encompasses the world’s largest free trade area (the United States, Mexico, and Canada), linking 450 million people producing $17 trillion in goods and services.

“NAFTA is the world’s most dynamic free trade agreement,” says Cora Di Pietro, vice president and general manager of consulting for Livingston International. “It has enhanced the economies of all three countries.”

Since NAFTA’s passage, Mexico has become the third-largest U.S. trading partner behind Canada and China. However, it is the second-largest export market for U.S. businesses, and nearly one-half of U.S. states depend on Mexico as their No. 1 or No. 2 export market, according to the U.S. Chamber of Commerce; 80 percent of trade is transported across the border by truck.

 

U.S. companies investing in Mexico

With the economy seemingly in perpetual recovery mode, U.S. companies have moved forward on building new facilities in Mexico to take advantage of NAFTA’s benefits – projects that were delayed because of the recession.

Aside from NAFTA, there are other factors that play into Mexico’s favor when companies contemplate international expansion projects:

•  Companies can manufacture in Mexico and take advantage of the numerous free trade agreements the country has with other nations. (Mexico has more free trade agreements than the United States.)

•  The supply chain from Mexico is shorter, compared with China.

•  The cost of labor is rising in China, making Mexico an attractive destination for international expansion projects.

The Boston Consulting Group (BCG) said in a report last year that wages in Mexico will be significantly lower than in China by 2015. The report noted that Mexican factory workers earned more than four times as much as Chinese workers in 2000. After China’s entry into the World Trade Organization in 2001, maquiladora industrial zones bordering the United States experienced a large loss in manufacturing.

By 2010, however, Chinese workers were earning only two-thirds as much as their Mexican counterparts. BCG forecasts that the fully loaded cost of hiring Chinese workers will be 25 percent higher than the cost of using Mexican workers by 2015.

And according to Maquila Reference, a reference guide to the maquiladora industry, manufacturers producing goods for the U.S. market are reconsidering their manufacturing options in China, and looking at Mexico’s dual benefits of low-cost labor and reduced tariffs under various NAFTA clauses.

Companies with manufacturing operations in Mexico have two different logistics strategies.

Some companies use established U.S. logistics networks to ship from their Mexico-based plants. “They are piggybacking on their existing logistics infrastructure, plus taking advantage of the low cost of labor and production in Mexico,” Howland says.

Other companies are building distribution centers in Mexico, where product can be distributed globally at a lower cost than from the United States. “The property costs (on both sides of the border) are about the same, but labor and environmental costs are lower (in Mexico),” says Steven Zisser, an attorney with San Diego-based Zisser Group, which focuses on Customs law. “There are fewer restrictions on the Mexican side.”

An example, according to Zisser, is Plantronics, a manufacturer of audio communications equipment. The company’s worldwide distribution center is located in Tijuana, where it ships product around the world. “The company takes advantage of Mexico’s many free trade agreements,” Zisser says. “It saves millions of dollars in duties.”

Most plants are located close to the border in the states of Baja California, Sonora, and Chihuahua. Part of the attraction of the border region is the maquiladora industry, which allows foreign-based manufacturers to import material and equipment on a duty- and tariff-free basis for assembly, processing, or manufacturing and then re-export the assembled, processed and/or manufactured products, sometimes back to the raw materials’ country of origin.

Because of the short drive to the United States, the logistics infrastructure in the border region isn’t as critical a site location factor as it is in other parts of Mexico, Zisser says.

Another factor in siting facilities close to the border is convenience. “Executive teams can cross quickly for the day,” says Zisser, pointing to Toyota, which operates a daily shuttle between its U.S. headquarters in Torrance, Calif., and plant in Tijuana, a two-hour trip.

Increasingly, however, companies with an interest in building a facility in Mexico are looking at sites in the interior of the country, especially the region that encompasses Mexico City, Guadalajara, and San Luis Potosi.

“Growth in manufacturing and assembly plants is taking place further south,” Howland says. “There is a lot of strength in the interior regions of the country.”

Interior state governments and local communities are offering generous incentivepackages to offset the cost of construction, and there is better access to utilities and labor, along with a lower cost for land.

“States in the interior region are just as competitive as U.S. states,” Zisser says.

Governments are helping to finance the construction of industrial parks in the interior region and upgrade the logistics infrastructure leading to the United States.

Companies can find a more stable workforce in the interior region, as compared with the border region, Howland says. One reason is because maquiladora workers along the border tend to move from job to job.

 

Moving cargo into the U.S.

Logistically, manufacturers can take advantage of a dedicated intermodal service between Kansas City, Dallas, and several Mexican destinations operated by Kansas City Southern Railroad and Kansas City Southern de Mexico. Kansas City Southern de Mexico operates a rail system of 2,645 track miles, serving Northeast and Central Mexico, and the port cities of Lazaro Cardenas and Tampico. It provides a direct connection between the United States and Mexico’s industrial heartland.

The service is the beginning of a key segment within the growing KCS International Intermodal Corridor and an alternative to the more congested Chicago gateway for traffic between Mexico and the Northeast and Midwest U.S. In addition to market competitive transit times and rates, the service allows for a fast and efficient border crossing.

From the border crossing in Laredo, Texas, manufacturers can use Interstate 35, which stretches to Duluth, Minnesota, near the Canadian border, and intersects with practically every major east-west interstate. Along I-35, manufacturers can find a group of metropolitan areas in the southern Interior Plains region of the United States, running from San Antonio, Texas, to Kansas City. Each metro area has logistical strengths that companies considering export opportunities in Mexico or a manufacturing facility in Mexico seek. wt

 

Sidebar:  Mexico’s industrial sector strengths


While Mexico attracts a variety of industries, the country’s heavily encourages expansions in the automotive, aerospace, and medical device industries.

Automotive: Ford, General Motors, and Toyota have established manufacturing facilities along the border. According to Maquila Reference, Baja California is a “preferred destination for the North American, European, and Asian automakers, with more than 60 foreign automotive companies in the region.” In addition, there are more than 1,100 tier-one automotive suppliers in Mexico, many of which have multiple manufacturing facilities in the country.

Eighty percent of vehicles produced in Mexico are exported to the United States, and 11 out of every 100 automobiles sold in the United States are made in Mexico, according to Maquila Reference. Auto production in Mexico is expected to reach 2.4 million units annually by 2014, with a projected growth rate of 5.5 percent per year, while generating 56,000 jobs.

Aerospace: According to the Mexican Aerospace Industry Federation, the aerospace sector in Mexico is expected to create 35,000 jobs during the next several years. Currently, more than 190 aerospace companies have operations in Mexico, employing about 190,000 workers.

The federal government believes that Mexico can become a producer of planes for international markets within the next decade, according to Geo-Mexico.

The city of Querétaro has become the hub of Mexico’s aerospace sector, with several companies choosing it for manufacturing operations.

Another company starting production in Querétaro is Eurocopter, a manufacturer of helicopters. The Europe-based conglomerate is investing $550 million to build a facility that will produce components for the aeronautical industry, primarily for export. The components include door structures and tail sections for Airbus and other planes.

Medical Device:More than 230 companies comprise Mexico’s medical device industry, with an estimated value of about $3.4 billion. Of the medical devices manufactured in Mexico, 92 percent are exported to the United States.

Baja California is home to a medical device manufacturing cluster, including Cardinal Health, Medtronic, and ICU Medical Inc., with more than 65 plants in the area dedicated to medical device manufacturing and responsible for 35,000 jobs.